Q3 2023 Summary
Published Jan 27, 2025, 7:30 PM UTC- Strong Book-to-Bill Ratios Indicate Future Growth: Curtiss-Wright reported an overall book-to-bill ratio of 1.2x, with the Defense Electronics segment achieving 1.3x, marking the third consecutive quarter of strong book-to-bill in that segment. This robust order intake suggests sustained future revenue growth across key segments.
- Effective Supply Chain Management Driving Growth: Despite ongoing industry-wide supply chain challenges, Curtiss-Wright has effectively managed these issues by implementing new systems and approaches. This has enabled them to project 12% to 14% growth in the Defense Electronics segment , indicating strength compared to competitors.
- Positioned to Capitalize on Naval Defense Opportunities: Curtiss-Wright is a solid supplier across submarine programs with a great reputation and is proactively seeking to expand its content as other suppliers face challenges. With potential increases in Virginia class submarine production, AUKUS-related projects becoming more clear, and funds available in defense budgets for submarine suppliers, the company is well-positioned to benefit from these expansions.
- Curtiss-Wright's industrial market has experienced a steady decline in orders since 2021, and although order rates flattened in Q3, the company is dealing with slack in customers' inventory, indicating potential ongoing softness in this market segment.
- The company's operating margin expansion in 2023 is limited, increasing by only 20 basis points on 8% organic growth, due to headwinds such as the winding down of the CAP1000 program (a $20 million revenue headwind year-over-year) and increased R&D investments (over $20 million in total R&D spending), which may continue to pressure margins and limit near-term profitability improvements.
- Curtiss-Wright continues to face supply chain challenges with longer lead times and volatility in component availability, particularly with legacy components, and there is "no clear line of sight on when the supply chain would perform at that level again," potentially impacting operations and margins.
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Potential Nuclear Business
Q: What's the outlook for nuclear and AP1000 opportunities?
A: The potential is significant, with room for 50 to 100 reactor coolant pumps (RCPs), representing over $1 billion to potentially north of $2 billion of business for Curtiss-Wright. We expect meaningful orders in the next 2 to 4 years, mirroring or surpassing the previous China direct order. -
AP1000 Order Timing
Q: Could AP1000 orders arrive earlier, in '23 or '24?
A: While we desire earlier orders, discussions with Westinghouse indicate orders are expected in 2 to 4 years. As global commitments to AP1000 plants grow, there may be pressure to accelerate timelines, but currently, we don't foresee orders arriving sooner. -
Margin Profile and Headwinds
Q: What's driving margin expansion and 2024 outlook?
A: Despite a $20 million year-over-year headwind from the winding down of AP1000 and increased R&D investments of $5 million, we're achieving incremental margins of about 27%. For 2024, we expect no AP1000 headwind and anticipate positive contributions from the Columbia Class submarine ramp and FMS sales growth. -
Supply Chain Conditions
Q: Are supply chain issues impacting output and margins?
A: Supply chain has stabilized but isn't back to 2019 levels. Lead times remain extended, with some components over 52 weeks, particularly older legacy parts. We've implemented new systems and approaches to manage these challenges successfully. -
Book-to-Bill and Orders
Q: How strong were orders this quarter across segments?
A: We achieved a total book-to-bill ratio of 1.2x, with Defense Electronics at 1.3x, marking the third consecutive quarter of strong bookings. Orders are robust in defense markets, with notable growth in the nuclear submarket and commercial aerospace. -
SMR Opportunities
Q: Updates on SMR discussions with Hitachi and Rolls-Royce?
A: We're over $100 million of content on X-Energy's four-unit plant and continue to explore additional systems. We've secured a major control system contract with TerraPower. Activity is steady across major SMR reactors, and we aim to share more at our Investor Day. -
AUKUS Naval Opportunities
Q: Developments in AUKUS benefiting Curtiss-Wright?
A: Activity around AUKUS is increasing and becoming clearer. While specifics are confidential, we believe it will be a significant tailwind for us, though timing and details are not yet public. -
Capacity for RCP Production
Q: Can you meet RCP demand alongside submarines?
A: We have capacity to ramp up production by adding shifts and staff at our Cheswick plant. We may consider footprint expansions later in the decade to support increased demand from SMRs and AP1000 orders. -
M&A Pipeline
Q: Outlook for M&A activity by year-end?
A: Our pipeline is healthy with several interesting properties. While the high cost of capital has made us cautious, we're optimistic about potential acquisitions in 2024 that meet our strategic and financial criteria. -
Free Cash Flow and Working Capital
Q: Opportunities to improve working capital and cash flow?
A: We've reduced working capital as a percentage of sales by about 300 basis points year-over-year. We're focusing on collections and inventory burn-down, expecting to finish the year at 24% of sales, showing 200 basis points of improvement. -
Submarine Industrial Base
Q: Is submarine base fragility affecting you?
A: We have a solid position across submarine programs and are in discussions to expand our content as other suppliers face challenges. We're proactively engaging with customers to support critical submarine programs. -
Infrastructure Bill Impact
Q: Does infrastructure funding benefit your business?
A: Indirectly, yes. We have exposure to construction vehicles and civil nuclear fleet investments benefiting from the bill. It's a supportive tailwind across our businesses, including content in vehicles and nuclear plant life extensions.